POMERANTZ MONITOR MAY/JUNE 2016
CFPB Proposes Rule to Override Arbitration Clauses in Contracts for Financial Transactions.
As the Monitor has reported, the Supreme Court opened the door recently to allowing companies to enforce arbitration clauses in contracts with their customers, which would bar class actions. Because most consumer claims are too small to warrant prosecution on an individual basis, this tactic has the potential to insulate these companies from any avenue of redress.
On May 5, the Consumer Financial Protection Bureau issued a proposed rule that would restore customers’ rights to bring class actions against financial firms. The rule would apply to bank accounts, credit cards and other types of consumer loans. As reported in the Times, the new rules would mean that lenders could not force people to agree to mandatory arbitration clauses that bar class actions when those customers sign up for financial products. The changes would not apply to existing accounts, though consumers would be free to pay off their old loans and open new accounts that are covered. The rule would apply only to the consumer financial companies that the agency regulates. It would not apply to arbitration clauses tucked into contracts for cellphone service, car rentals, nursing homes or employment.
The rules are not subject to Congressional approval.
Labor Department Issues Rule Imposing Fiduciary Duty on Brokers Who Advise Clients Investing in Retirement Products or Accounts.
Acting under authority conferred by ERISA, the Labor Department has finally issued a rule requiring brokers who give retirement advice to clients to enter into contracts with them affirming that they have a duty to recommend transactions only when they are in the client’s best interest. The current rule requires only that the investments they recommend be “suitable” for the clients, leaving room for brokers to recommend investments that generate the biggest fees for themselves, rather than those that are best for their customers.
For years the financial services industry has warned that this rule change would impose an enormous burden on them and on investors as well, whose costs (they say) would increase. But, as Senator Elizabeth Warren pointed out recently in a letter to the SEC, some of the biggest objectors to the new rule have been telling their own shareholders that they have nothing to worry about if the fiduciary rule is adopted. That is like trying to have your cake and eating it too.
Warren sent her letter to the SEC because that agency has so far failed in its obligation to revise these rules for regular, non-retirement brokerage accounts and other advisory relationships, even though the Dodd Frank Act requires the agency to do so.
Agencies Try To Rein In Executive Compensation.
In April the National Credit Union Administration unveiled its proposal to implement a provision of the Dodd-Frank Act by requiring that incentive compensation that top financial executives receive gets deferred for several years and that firms put in clawback provisions so they can take back bonuses paid to executives responsible for significant losses or illegal actions.
The Dodd-Frank Act charged the NCUA, the Federal Reserve, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission with writing rules or guidance that would restrict bonus and other incentive compensation for financial executives, in a bid to limit the temptation to take on excessive risk. Some of these other agencies, at least, are expected to echo the NCUA’s proposal.
U.S. financial regulators set up three different tiers for implementing rules, with executives at firms with $250 billion in assets facing the toughest restrictions, followed by those at firms with assets between $50 billion and $250 billion. Firms that have between $1 billion and $50 billion will be required to put in place risk-management, record-keeping and other monitoring tools.
Nastiest Case in Delaware.
The Delaware courts, which handle serious matters of corporate governance, are well known for their decorum and high mindedness. But the Delaware Supreme Court is currently mulling the appeal in one of the nastiest, tackiest cases to hit that state in a long time. Alan Morelli, the former chairman of OptimisCorp., a California based healthcare company, is suing the directors who abruptly terminated him in 2012, after receiving accusations that Morelli had sexual relations with an employee and also sexually harassed her. Three of those directors filed their own action against the executive, claiming that in retaliation for their dismissal of him he launched a legal vendetta against them, using $12 million of company funds. After a six day trial last year, the Chancery Court dismissed Morelli’s claims against the directors, concluding that they were unproven. The vice chancellor added that his decision also reflected a sanction against Morelli for paying or threatening witnesses with criminal prosecution or civil action “based on questionable or baseless claims.” One female therapist who accused Morelli of sexual harassment later withdrew the claim, after receiving a promise of a $550,000 series of payments in exchange for her testimony.
During the argument of the appeal, Supreme Court Justice Strine asked whether Optimis is “one of the weirder companies that exists in the world,” observing that “one of the officers of the company was having a relationship with
Mr. Morelli’s ex-wife,” while Morelli, whose office was in his bedroom, was having relations with the employee who subsequently accused Morelli of harassment.